Exhibit 99.2
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
Page 1
DYCOM INDUSTRIES, INC.
November 25, 2003
8:00 a.m. CST
Moderator Ladies and gentlemen, thank you for standing by. Welcome to the
Dycom Fiscal Year 2004 First Quarter Earnings conference call. At
this time all participants are in a listen-only mode. Later we
will conduct a question and answer session and instructions will
be given at that time. As a reminder, this conference is being
recorded.
I would now like to turn the conference over to our host, Steve
Nielsen, President and CEO. Please go ahead.
S. Nielsen Thank you, Linda. Good morning, everyone. I'd like to thank you
for attending our first quarter fiscal 2004 earnings conference
call. With me we have in attendance Richard Dunn, our Chief
Financial Officer; Tim Estes, our Chief Operating Officer; and
Mike Miller, our General Counsel.
Now I will turn the call over to Mike Miller. Mike.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
Page 2
M. Miller Thanks, Steve. Statements made in the course of this conference
call that state the company's or management's intentions, hopes,
beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that the
company's actual results could differ materially from those
projected in such forward-looking statements.
Additional information concerning factors that could cause actual
results to differ materially from those in the forward-looking
statements is contained from time to time in the company's SEC
filings including, but not limited to, the company's report on
Form 10-K for the year ended July 26, 2003. Copies of these
filings may be obtained by contacting the company or are
available on the SEC's Web site. Steve.
S. Nielsen Thanks, Mike. Yesterday after the markets closed we issued our
first quarter 2004 earnings release. Previously, on November 6th,
we announced entering into an agreement to purchase substantially
all of the assets of First South Utility Construction, a provider
of outside plant construction and engineering services to
telecommunications providers throughout the United States.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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Furthermore, on November 17th we announced the execution of a
definitive merger agreement with Utiliquest Holdings, whereby
Utiliquest will become a wholly-owned subsidiary of Dycom.
Utiliquest provides underground utility locating services
throughout the United States. Both acquisitions are subject to
customary closing conditions and are currently expected to close
before the end of the first week of December.
Given the substantial amount of information to be reviewed today,
I will now outline the structure of this call. First I will recap
the earnings release and provide backlog information. Second, I
will comment on our first quarter and review recent industry
developments, along with our contract awards and extensions
during the quarter. Third, I will provide some general
information concerning our agreements to acquire First South and
Utiliquest. More details will be provided shortly, after the
closing of these pending acquisitions. And finally, prior to
Dick's detailed review of the financials, I will outline our
outlook for the second quarter.
Now for our results: For the quarter ending October 25, 2003
total contract revenues were $196 million versus $158.5 million
in the year ago period, an increase of over 23%. Net income was
$13.9 million for the October quarter versus $4.1 million in the
year ago quarter, an increase of
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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239%, while fully diluted earnings per share was $0.29 versus
$0.09, an increase of 222%. Backlog at the end of the first
quarter of fiscal 2004 was $900.4 million versus $890.9 million
at the end of the fourth quarter of 2003, a sequential increase
of $9.5 million. Of this backlog approximately $417 million is
expected to be completed in the next 12 months. These estimates
of total backlog and 12-month backlog do not include any amount
with respect to our pending acquisitions of First South and
Utiliquest.
Our first quarter results continued to demonstrate solid organic
growth, significant margin expansion, and a noteworthy increase
in operating cash flow. Revenue increased sequentially by $13
million from the prior quarter and by over $37 million from the
year ago quarter. This represents an organic growth rate of
23.7%. In addition, our forecasted second quarter revenue
indicates continued year-over-year organic growth.
Gross margin increased by 81 basis points sequentially from the
fourth quarter to 24.98%, while sequentially both G&A and
depreciation and amortization decreased slightly. Both the G&A
and depreciation and amortization percentages continued to be
favorably impacted as relatively
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Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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fixed costs were leveraged by increased quarterly revenue. The
pre-tax margin expanded by over 100 basis points from last
quarter.
Liquidity remained ample with over $149 million in net cash. Cash
increased by $19.9 million during the quarter, despite $2.4
million of capital expenditures net of disposals, which were
required to support our growth. Day sales outstanding was 75
days, a sequential decrease of two days during the quarter. Cash
flow from operations totaled $21.2 million and working capital
increased sequentially from the prior quarter.
During the quarter we welcomed the effects of a growing overall
economy, major telephone company expenditures, which grew year
over year and sequentially for the first time in over two years,
and robust spending by several cable customers. Revenue from
Comcast was $68.2 million. Comcast was Dycom's largest customer
for the quarter at 34.8% of revenue, down from 38.1% in the
previous quarter.
Additionally, revenue from Charter and Patriot Communications
both increased sequentially. Revenue from our major telephone
company customers - Sprint, Bell South, Qwest and Altel -
increased both sequentially from the fourth quarter and year over
year.
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Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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Employee headcount increased to 5,470 at the end of the first
quarter from 5,259 in the previous quarter.
And perhaps most interestingly, a major incumbent local exchange
carrier last week announced the winners of its RFP for the
telecommunications equipment required for a technology known as
fiber to the premises or FTTP, and outlined its five-year
deployment plans. Furthermore, a senior industry executive was
recently quoted as saying, "World-class networks are essentially
the critical infrastructure that provide the product
differentiation that we offer in the marketplace." This view
evidences the central importance of our services to our customers
and signals a possible upturn in telephone company capital
expenditures and fiber deployments in calendar 2004 and beyond.
During the quarter we continued to book new work. For Comcast we
received system upgrade contracts for Salt Lake City, Upton,
Michigan, and Santa Cruz, California; and for Adelphia, upgrade
projects for Morrow, Ohio and Frederick, Maryland.
In addition, we secured several master contracts for telephone
companies, including extensions with Bell South for Chattanooga
and Knoxville,
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Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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Tennessee and with Citizen Communications for Tennessee, West
Virginia, and Pennsylvania. Finally, we were awarded two new
contracts from Altel for Lexington and east Kentucky and two new
central office contracts for SBC Communications in Kansas City
and Oklahoma City.
Now for a general review of our pending acquisition of First
South. First South Utility Construction is headquartered in
Greensboro, North Carolina and provides its services throughout
the eastern United States. The acquisition of substantially all
of its assets will enhance our scale, increase both our customer
diversification and penetration, yield obvious synergies, and
present margin expansion opportunities. Due to its geographic
location it fits naturally within our current southeast
operations and expands our already leading capabilities in that
crucial regional market. It increases our exposure to telephone
company expenditures and an upturn in the general economy.
Given its overlap with our current subsidiary operations, First
South will be completely folded into two existing Dycom
subsidiaries. Integration planning is well advanced, and we
anticipate the elimination of significant
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Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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amounts of duplicative overhead and the generation of meaningful
cost synergies.
Upon completion of the integration, we expect cash flow margins,
which equal or exceed current Dycom cash flow margins. We
anticipate that the acquisition will be accretive no later than
our April quarter. The First South acquisition presents
significant strategic benefits and has been well received by our
joint customers and employees.
Next I'll review our pending acquisition of Utiliquest.
Utiliquest is headquartered in Atlanta, Georgia and provides
underground utility locating services throughout the country. It
is generally viewed as the largest locating firm in the United
States. Its acquisition will enhance our scale, provide
significant product line and customer diversification, expand our
geographic footprint, yield clear and quantifiable synergies, and
present margin expansion opportunities.
Utiliquest currently employs over 1,900. It, in conjunction with
our existing locating operations, will possess unparalleled
scale, capability, and resources to serve our customers. It
dramatically increases our exposure to routine and recurring
maintenance expenditures by our
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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customers, and will position Dycom to broadly benefit from an
upturn in general economic activity. It has a strong geographic
presence in the mid-Atlantic, southeast, Texas, Colorado, and
California.
Given its operational overlap with one of our locating
operations, Utiliquest will be combined administratively with an
existing Dycom subsidiary. Integration planning is ongoing, and
we again anticipate the elimination of significant amounts of
duplicative overhead and meaningful cost synergies. Upon
completion of the integration, we expect cash flow margins, which
equal or exceed current Dycom cash flow margins, although those
margins will be seasonally stronger from April through October
each year. We anticipate that the acquisition will be accretive
no later than our April quarter.
The Utiliquest acquisition strategically positions Dycom to
uniquely benefit from a general economic upturn, any increase in
overall excavation activity, including any activity arising from
fiber to the premise initiatives, and dramatically increases the
portion of Dycom's revenue driven by routine and recurring
expenditures by our customers. It has been well received by our
joint customers and employees.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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As Dycom grew this quarter, we demonstrated our continued
stability and unparalleled ability to profitably respond both
organically and through acquisition to growth opportunities.
First and foremost, we maintained strong customer relationships
throughout our markets. This view has been clearly demonstrated
in multiple discussions with our customers arising from our two
announced acquisitions. Net cash remained ample and grew over $19
million in the quarter, and our already strong working capital
position strengthened.
As economic conditions improve, Dycom's superior financial health
has allowed us to differentiate ourselves from our competitors in
the eyes of our customers, employees, and suppliers. Dycom's
financial strength and strong customer relationships have been
key to our ability to demonstrate marked organic growth and
pursue significant strategic acquisitions simultaneously.
Over the last several quarters we have repeatedly stated our
belief that, as profitable growth opportunities return to our
industry, we will be one of the first of the best-positioned
firms in our industry to take advantage of them. We believe that
this advantage, relative to other industry participants,
continues to become more pronounced every day.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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After weighing all of the factors we have discussed today, we
have updated our forecast as follows: For the second quarter of
fiscal 2004 we anticipate earnings per share of $0.13 to $0.17 on
revenues of $140 million to $155 million. This outlook
anticipates a growing economy in the U.S.; normal, but not
especially difficult seasonal weather; continued spending by
Comcast on its acquired systems; and firming seasonal demand from
our telephone customers.
This outlook does not include any revenues or earnings from our
pending acquisitions of First South and Utiliquest. We will
update our outlook upon the closing of these acquisitions.
At this point I will turn the call over to Dick Dunn, our CFO.
Dick.
R. Dunn Thank you, Steve. Contract revenues for the current quarter were
$196 million, up 23.7% from last year's Q1 of $158.5 million. For
the quarter, sales from our top five customers accounted for
69.7% of total revenues versus 56% for the prior year's first
quarter.
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Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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The top five customers for the two periods are as follows: For Q1
of fiscal year 2004 customers were Comcast at 34.8%; Sprint at
13.7%; Bell South, 10.9%; Qwest, 5.6%; and Adelphia, 4.7%.
For Q1 of fiscal year 2003 the top five customers are as follows:
Comcast at 22.4%; Bell South, 12.6%; DIRECTV, 8.2%; Sierra Touch
America, 6.5%; and Charter Communications, 6.3%.
Net income for the first quarter was $13.9 million versus $4.1
million in fiscal year '03, representing an increase of 238.5%.
Fully diluted earnings for the quarter were $0.29 per share, a
222% increase from last year's $0.09 per share results. Operating
margins for the quarter increased 763 basis points, coming in at
11.29% versus last year's 3.66%. This increase was due to a 296
basis point decrease in cost of earned revenues, a 260 basis
point decrease in general and administrative expenses, and a 207
basis point decrease in depreciation and amortization.
The effective tax rate for the quarter was 40.2% versus 42.5% for
the prior year's period. Net interest income for the quarter was
approximately $318,000 versus $275,000 for the comparable prior
year period. This
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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interest income is generated through investments in high quality
municipal and corporate instruments.
Other income for the quarter, consisting primarily of gains
associated with the disposition of fixed assets, was $800,000
versus $1.1 million for the comparable quarter in our fiscal 2003
year.
Operating activities for the quarter resulted in positive cash
flow of $21.2 million. The primary components of this amount were
net income of $13.9 million and depreciation and amortization of
$9.3 million, partially offset by increases in working capital of
approximately $2 million.
Investing and financing activities for the quarter resulted in
the use of $1.2 million. The primary components of this amount
were capital expenditures of $3.8 million, partially offset by
proceeds from the sale of fixed assets of $1.4 million and $1.2
million of proceeds associated with the exercise of employee
stock options. Cash and cash equivalents at the end of the
quarter were $149.8 million, up $19.9 million from the prior
quarter.
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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During the quarter current net receivables increased $2.8 million
to $124.8 million, resulting in a DSO of 57.9 days. This figure
represents a decrease of 2.8 days from the last quarter's DSO of
60.7 days. Net unbilled revenue balances increased in the quarter
from $34.1 million to $36.6 million, resulting in a DSO of 17
days, unchanged from last quarter. On a cumulative basis the
combined DSO for our trade receivables and net unbilled revenues
decreased from 77.7 days to 74.9 days, a decrease of 2.8 days.
Net intangible assets were essentially unchanged at $107.3
million, and finally, at October 25th the accrual for our
self-insured casualty program decreased $500,000 to $24.9 million
from the prior quarter's balance of $25.4 million. Steve.
S. Nielsen Thanks, Dick. Now, Linda, we'll open the call for questions.
Moderator Our first question comes from the line of Steven Fox with Merrill
Lynch. Please go ahead.
S. Fox One quick question. Can you just clarify your 12-month backlog?
Did you say it was $417 million or $470 million?
DYCOM INDUSTRIES, INC.
Host: Steven Nielsen
November 25, 2003/8:00 a.m. CST
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S. Nielsen It was $417 million, Steve.
S. Fox Then could you provide a little bit more detail on the
acquisitions, at least maybe in terms of trailing look at sales
and EBITDA levels or something along those lines?
S. Nielsen I think, Steve, because we haven't closed them we're going to be
careful, but in the case of First South we expect revenues of in
the mid-40s. With regards to Utiliquest, I think there is public
information out on their Web site that would indicate revenues in
excess of $125 million to $130 million. We would expect those
revenues and some more.
S. Fox And you expect them to be as profitable as ...
S. Nielsen As our current cash flow margins. That's the plan.
S. Fox And then the last question, just on the Comcast business. How
much business do you expect to see decline, say, over the next
couple of quarters as some of the upgrade work is done? How much
is that risk?
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November 25, 2003/8:00 a.m. CST
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S. Nielsen I don't know that it's a risk, Steve. What we're managing, as
Comcast has, you know, stated publicly, and we've said it all
along, that by the middle of next calendar year they will be
substantially complete with their targeted AT&T upgrade. There
will be some other upgrades that are ongoing just given the
nature of their system, and so we have a pretty good handle on
what backlog does over the next couple of quarters. We also are
having discussions with them and with others about ongoing
maintenance and capital upgrade or capital opportunities, and
those are, at this point, still not determined, given that
everybody is still focusing on meeting the schedule for the
middle of next year.
S. Fox Thank you very much.
Moderator Our next question comes from the line of Mark Hughes with
SunTrust. Please go ahead.
M. Hughes With respect to the fiber to the premises, any activity in terms
of signing up contractors as of yet, and does it look like that
will be sort of in conjunction with equipment manufacturers or
the carrier is going to do that contracting separately?
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November 25, 2003/8:00 a.m. CST
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S. Nielsen Mark, what we know is publicly available. Verizon made an award
last week of their equipment RFP, and had indicated that they
were in the process of having a discussion about construction
services to get that placed. Beyond that we can't comment.
M. Hughes When would you normally start to get more details or see this
activity pick up?
S. Nielsen When Verizon shares them with everybody.
M. Hughes Okay. How did Utiliquest do during the downturn in '01 and '02?
Can you give us a sense of what their peak might have been, how
much volatility they saw?
S. Nielsen They've actually grown throughout that period, Mark. The locating
business is much more generally correlated with the overall
economy rather than cap ex specifically, and so their business,
like our own if you look at our locating business over that time
period, has actually had some modest, but steady, growth.
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M. Hughes Then in terms of valuation on the acquisitions, anything you can
say in terms of multiple and then to what sort of earnings you
applied that to? Was it trailing? Was it forward? What did you
pay and what was your methodology?
S. Nielsen I think, Mark, historically, and we're glad to hear from you
again, you know that we've paid anywhere from four times cash
flow to six times and I think both of these deals, after we get
them integrated into our structure, will fall squarely in that
range.
M. Hughes Great. Good to chat with you. Thanks.
Moderator Our next question comes from the line of Alan Metroni with Copper
Beach Capital. Please go ahead.
A. Metroni Could I just get a little more customer information? Could you
tell us what DIRECTV was in the quarter as a percent of revenues?
S. Nielsen Yes. I show 3.19%, Alan.
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November 25, 2003/8:00 a.m. CST
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A. Metroni Charter Communications, you talked about getting some contracts
or seeing some increase there, but I didn't see them show up on
your customer list as a top five. Can you just give us a couple?
S. Nielsen Yes. It was 2.94%, which was up sequentially again. That's the
second quarter in a row that it was up.
A. Metroni Also, I was a bit surprised that Adelphia actually went down on a
dollar basis given the cap ex that they're spending, but you
talked about seeing ramp ups there. Can you just give us some
more detail?
S. Nielsen Yes. I think, at least in the areas that we are seeing some
growth with Adelphia, they are still getting the head end
infrastructure in place and some of the basic building blocks. I
think that equipment is expensive and it has to be spent first
before we can get to the upgrades. So with the recent awards that
we have seen with Adelphia, we actually think that once they get
that head in infrastructure in place that they will be pushing to
up the pace of upgrade spending.
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November 25, 2003/8:00 a.m. CST
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A. Metroni So actually, call it, roughly $10 million run rate that we've
seen the last couple of quarters that you've done with Adelphia
is really pretty understated and is going to get a lot better
over the next 12 to 24 months?
S. Nielsen My sense is that activity is picking up. They are pushing to get
projects at run rates going into next year. The only caveat
there, Alan, is we do do a substantial amount of work for
Adelphia in northern New England, and so our ability to ramp up
through the winter may be impacted by weather.
A. Metroni Also, you talked about Altel, that you won some MSA work there.
What percentage of business was Altel this quarter?
S. Nielsen A little over 4%.
A. Metroni And have we seen and can you give us a size as to how big that
contract could be when it's finally up and running or how much of
it contributed this quarter, the ones in Lexington and eastern
Kentucky?
S. Nielsen When they're up and running, and we're in the process of gearing
those up fully for the first of the year, we could expect $8
million to $10 million out of those contracts.
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A. Metroni Is that annually or is that ...
S. Nielsen That's annually and that's incremental.
A. Metroni Also, since you brought up the Verizon RFP in general, or I guess
in response to a question from Mark, do you have any sense of
timing as to when they may award the contracts? I realize the
equipment vendors have gotten theirs. Do you think they want to
tie this all up before year-end?
S. Nielsen We have no view on their timing.
A. Metroni Let me ask you a different theoretical question and I'll get back
in queue. Based on what ... was saying at some recent
conferences, they were talking about a million homes. By my math
that equates to, if they want to do that next year, somewhere
close to $300 million in revenues from a construction piece. Is
that in the ballpark?
S. Nielsen Alan, there are so many variables that go into making that
analysis and we're just not going to speculate.
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A. Metroni Okay, but you haven't factored that into any of your estimates,
right? Any of your expectations?
S. Nielsen We have not factored anything other than what we know about
today.
A. Metroni I'll get back in queue. Thank you.
Moderator Our next question comes from the line of Alex Rygiel with
Friedman, Billings, Ramsey. Please go ahead.
A. Rygiel Thank you and very nice quarter, gentlemen.
S. Nielsen Thanks, Alex.
A. Rygiel Steve, you mentioned several times that with regards to your two
acquisitions current cash flow margins are equal to or slightly
better than Dycom's current cash flow margins. Could you define
what current means?
S. Nielsen Current quarter, Alex. As always, you know we've been doing
acquisitions for a long time; we want them to be accretive to our
margins.
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A. Rygiel So current cash flow is defined as the most recent quarter?
S. Nielsen The current quarter.
A. Rygiel Great. Thank you. Just generally speaking with regards to fiber
to the premise, are you seeing any of the other Bells discuss
taking fiber all the way to the home as aggressively as Verizon
is at this time?
S. Nielsen I have not seen anything publicly. I mean I think we have
historically done a lot of work for Bell South and green field
deployments with what they call fiber to the curb, which is
essentially the same deployment, and they are continuing to do
that in the new subdivision work that we do. We have also
deployed at times a fair amount of fiber to the curb for Sprint
in some of their growing markets. So I think those all continue.
Beyond that I have not seen any public comment.
A. Rygiel With regards to your Charter revenues in the quarter, was that
primarily driven from market share gains or increased spending in
existing markets by Charter?
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S. Nielsen I think it was both. We have picked up some additional work in
the southeast that we did not have six months ago, and they're
also continuing to spend in kind of their traditional Midwest
markets where we have served them for a long time.
A. Rygiel And you suggested, with regards to your two acquisitions, that
there's going to be a fair amount of office consolidation. At
what point in time in the future will you update us on whether or
not you'll be taking any type of a charge for that?
S. Nielsen We have no plans to take a charge at this point, Alex, as we have
not taken charges on prior acquisitions. We'll fair value the
assets and liabilities through the purchase accounting, and while
there will be some modest severance costs, they're anticipated in
our outlook.
A. Rygiel Great. One last question: Do you have any further plans to make
acquisitions over the next six to 12 months?
S. Nielsen Our view, Alex, is that we're going to be opportunistic. I mean
we feel good about where the general economy is, and if the
economy begins sustained growth, this is probably a good time to
be looking at acquisitions
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if you want to have a high likelihood that your forward multiples
three and five years out are lower than what you pay.
A. Rygiel Great. Thank you very much.
Moderator We have a question now from the line of Michael Jurinski with
Vinick Asset Management. Please go ahead.
M. Jurinski Great quarter. I have two questions here. The first one on the
tax rate; I believe you had previously been guiding towards about
42%, and I just wanted to find out what went into the lower tax
rate and what I should be looking at going forward?
R. Dunn We indicated last year that we had done some restructuring, which
would help our tax rate. Generally speaking, I think that at
these income levels that's probably a pretty good rate, this
quarter's rate, going forward.
M. Jurinski So I should model that going forward?
R. Dunn Yes.
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S. Nielsen I think the other thing is at this income level you know we have
some schedule M and book tax differences that the more money you
make they're a smaller percentage of your pre-tax income.
M. Jurinski The other one is can you give a little bit more color on the
business outlook you have going forward in terms of the
opportunities that are there? Your backlog is up sequentially.
You've come off of two real strong quarters now, and now your
forecast here seems to be indicating a much greater seasonal
drop-off than I would normally expect. I look at a normal drop
off for you seems to be about 10% to 15% from the first quarter
into the second quarter. Does this look like you're not in a
normal environment anymore or what's going on?
S. Nielsen No. I think what it indicates is we have growth with our
telephone company customers. We're going to be cautious about how
that extends into 2004 just because we're generally conservative.
If you pull out our Touch America revenue from the year ago
period, the rest of our telephone business was up about 14%/15%.
That's a good growth rate that surely hasn't been seen in a
while, and we want to be careful that we don't get ahead of
ourselves going into 2004. We do have the Comcast business where
we still have good business there, but we know by mid '04
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that they'd like to be substantially complete. Usually what
Comcast says they're going to do they will do, and so we're
factoring those into our outlook. I think when we did take
another look at it and updated our view from 90 days ago that our
current outlook for this quarter was better than our outlook was
90 days ago, which is a nice trend line; once again, something we
haven't had happen for a while.
M. Jurinski So from just the perspective of what it feels like out there from
a business standpoint, it's not feeling that it's any worse than
normal?
S. Nielsen No, I don't think so. I mean my general sense is that we're
seeing more opportunities and more growth. We're actually, and
this is a good thing in our business, there are certain projects
that customers are pushing to get spent in this budget year and
we're seeing a little bit of tightness in the labor supply. While
most people might think that's a bad thing, from our perspective
that's a good thing because it promotes discipline in the
marketplace.
M. Jurinski You had mentioned the headcount increased last quarter. Are you
still adding bodies?
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S. Nielsen Right now we're trying to add them so we can meet our customers'
needs.
M. Jurinski Great. Thank you very much. Great quarter.
Moderator We have a question now from the line of Matthew Berg with Leifer
Management. Please go ahead.
M. Berg Just a follow-on to that last question. Within the environment
that you're describing, do you think we're going to see a ramp up
in cap ex for fiscal '04 budgets?
S. Nielsen You know, I think, as always, it's difficult to forecast the
interaction of an upturn in the economy. With the capital budgets
of our customers just as kind of coming into a recession our
customers' budgets lag, kind of the downturn. They generally have
lagged in upturn. I mean if the economy shows two, three, four
quarters of 4% or 5% or 6% growth rate, that's clearly going to
drive access lines, clearly going to drive new housing, and in
every other economic cycle it has tended to firm and increase cap
ex, but there may be a lag. That's also historical...
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M. Berg That, in combination with the Verizon fiber to the premises and
then the Bell South and SBC, I mean this seems like this is a
very strong environment for your business. Any color on that?
S. Nielsen I think it's certainly a better environment to come to work in
every day than it has been since the first calendar quarter of
'01. We clearly like to see sustained momentum, both in the
general economy and with our customers' businesses. I mean we do
well when our customers do well, and to the extent that their
businesses pick up, I think they will be happy to spend money to
support growth. That's been difficult for them over the last
couple of years.
M. Berg Then, as someone a little bit new to the story, it seems like you
generated a significant amount of cash this quarter and you have
a lot of cash on your balance sheet. How are you going to use
that cash? Do you have a share buyback program? Are you going to
pay a dividend?
S. Nielsen If you look back, we've announced two cash acquisitions that are
not closed. They're pending, but we expect them to close before
the end of next week, and that will utilize substantially all of
our cash balance. We have a $200 million credit facility, and we
will probably utilize that so we
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don't draw down all of the cash, but right now is not a bad time
to be borrowing. I mean when you have a better outlook and you
have low borrowing costs, it's the time to reinvest in your
business.
M. Berg Absolutely. Congratulations on the quarter and thanks for your
answers.
Moderator We have a question now from the line of Steven Korn with Lowe's
Corporation. Please go ahead.
S. Korn Do you have any sense of, if Verizon passes a million homes in
'04, how much of that work they're planning on doing internally
versus outsourcing?
S. Nielsen I have not seen them comment on that so we don't have any view on
that right now.
S. Korn Then I know Steve asked this question again. You said $417
million was the next 12-month backlog?
S. Nielsen Yes.
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S. Korn And that compares to last quarter of $446 million?
S. Nielsen I think it was $446 million or $444 million, something like that.
The way our backlog is calculated is pretty conservative. For our
master contracts we look back 12 months, take our average monthly
revenue, and then forecast for the balance. So to the extent that
you're in an up cycle, you may underestimate your backlog because
you're looking at trailing numbers for the estimate.
To the same extent, when you come off strong numbers it may
overestimate the backlog. It's the consistent practice of the
company to do it this way, and so that does cause some
variability around the number quarter to quarter.
S. Korn And then just for modeling purposes, if you're paying mostly cash
for these acquisitions, what were you earning, approximately, on
the cash sitting on the balance sheet?
S. Nielsen We'd almost be embarrassed to answer. Dick, what is the number?
R. Dunn It's in the neighborhood of one percent.
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S. Nielsen One percent tax-free.
S. Korn So if you're earning one and then you're going to get ...
R. Dunn Tax free is more like 80/90 basis points.
S. Korn Thank you, guys.
Moderator We have a follow-up question from the line of Alan Metroni with
Copper Beach Capital. Please go ahead.
A. Metroni I missed the answer to the cap ex. What's your budget for this
coming fiscal year?
S. Nielsen It's about $22 million on cap ex.
A. Metroni That's gross, right?
S. Nielsen No. That's net of disposals.
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A. Metroni That's net of disposals. Okay. Do you have any sense as to a
gross number? Maybe $5 million more?
S. Nielsen Maybe $3 million or $4 million more.
A. Metroni Cap ex has been relatively low with regards to depreciation.
Maybe you could explain. I saw depreciation jump this quarter a
few hundred thousand, even though cap ex really hasn't picked up.
Was there something behind that, Dick?
R. Dunn Yes. Historically we have used a half-year convention method for
depreciation, although the last two years we've moved to a
straight line. What happens when you dispose of assets in the
early part of the year you end up with a half-year worth of
depreciation and so it kind of doubles up in the first quarter.
A. Metroni So you think we can go back to a run rate of sort of $8.9 million
roughly or something like that nature?
R. Dunn Yes.
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A. Metroni So this is sort of more of a one-time anomaly, right?
R. Dunn Yes, it should be.
A. Metroni Also, I know there are new rules. Are there any one-time charges
within the SG&A, either for bonuses, accruals for this past year
or for deal cost expensed into the numbers?
S. Nielsen The deal costs, Alan, are always part of the purchase accounting
to the extent that that's the way we account for them. So we've
had travel expenses and those kinds of issues, but nothing
material.
The bonuses are calculated on a formula that levers off a pre-tax
margin, and so I mean it's not a one-time charge. That's the way
we've always done it.
A. Metroni But that was in this quarter?
S. Nielsen It's in every quarter.
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A. Metroni So it goes. That's fine. Also, how many shares are outstanding as
of now?
S. Nielsen Are you talking basic or are you using treasury share ...
A. Metroni If you can, give us the basic number first and then talk about
options.
S. Nielsen As we have our annual shareholder meeting in about an hour and 20
minutes I guess we should know, but it's a hair under 48 million.
A. Metroni And in terms of options, just another maybe half a million?
S. Nielsen In terms of those that are in the money.
A. Metroni Yes.
S. Nielsen Yes, the treasury share method is about a half a million of
dilution.
A. Metroni That's fair. Just to follow up with Alex's question, I want to
understand, I just want to make sure I heard you right. You were
giving us trailing 12 months, roughly, revenues for First South
and Utiliquest?
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S. Nielsen Yes. That's a historic.
A. Metroni So roughly $175 million combined on a trailing basis, right?
S. Nielsen That's correct.
A. Metroni So one times revenues. It seems like when you talked about cash
flow margins you're talking about EBITDA margins?
S. Nielsen Yes.
A. Metroni Can I understand? The last couple of quarters you're running in
the 15%/16% type of level. Those are the margins you're talking
about to these companies?
S. Nielsen What we said was that they would be there or better and the
better is what the plan is.
A. Metroni Then do you still have the Adelphia receivable on your books?
S. Nielsen Yes. It's down there in the other long-term assets.
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A. Metroni So nothing has changed. Any progress with that? It seems like
probably within the next nine months or so that they're going to
be out of bankruptcy.
S. Nielsen We're generally encouraged that the market for unsecured claims,
which we consider to be inferior to the lien claims that we have,
have traded up significantly. So that is encouraging.
A. Metroni And lastly, when I run through, you're going to pay about $170
million in cash out of pocket for these deals, correct?
S. Nielsen Yes. That's what we've announced.
A. Metroni And with $150 million on your books, and it looks like you're
going into, obviously, seasonally slower quarters and cash flow
should be good. It seems like within a few months you'll have
still no debt on your books. Am I right in thinking that you
could pay this off relatively quickly?
S. Nielsen I don't know that we could pay it entirely off, but we can
certainly whittle it down substantially.
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A. Metroni And can you remind me of what the original amount of the
receivable was on Adelphia and what the carrying value is right
now?
R. Dunn Yes. The original amount was approximately $40 million, Alan, and
it's $21.4 million or thereabouts.
S. Nielsen $21.4 million.
A. Metroni $21.4 million you're carrying on your books?
R. Dunn Right.
A. Metroni That's fair. What do you pay right now on your line?
R. Dunn Of course, we haven't borrowed under it, but the grid pricing
would be LIBOR plus 1.5%.
A. Metroni LIBOR plus 1.5 basis points?
R. Dunn Of course, we're paying commitment fees, so we'd...50 basis
points currently, which would go away if we borrow.
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A. Metroni So basically you're still borrowing it under maybe 3% or less?
R. Dunn In that neighborhood.
S. Nielsen Incrementally, because we have cash so you have to also offset if
we keep cash what we'd earn on it. We can borrow pretty cheaply.
A. Metroni If I could step back for a second, rather than talking about
details and just looking at the big picture, in reading your
annual report, the chairman's letter, and in just hearing the
kinds of contracts and market share you're taking, it seems to me
that we're walking into a period that we haven't seen in years,
where cable looks like they still need to upgrade and spend money
on voice over IP and telco is looking at fiber, which could be
many, many years of work. How do you see yourselves playing in
the upgrade cycle? I mean is it go after the Verizon contract
soon or sit back and look for the Bell Souths and others? I mean
do you see much competition for getting these, given the working
capital needs and the experience you need to get this business?
S. Nielsen Alan, in this business you always have to be paranoid, and you're
only as good as whatever service you provide the customer today.
We're never
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Page 40
going to say that we're not concerned about the competitive
environment. We think that we husbanded our strength through the
recession and have positioned the company to do as well, if not
better, than other folks in the up cycle, but that's only as good
as our ability to execute it. All of the management who's on the
phone right now listening to this call know that because they
hear it every day.
A. Metroni And then lastly, thank you, I appreciate it, for the Altel you
talked about $8 million to $10 million incremental revenues on a
run rate basis for the MSA work. Citizens Communications in
Tennessee and West Virginia and others, how much is that MSA work
on an annual basis?
S. Nielsen It's been depressed, but I think it's in the neighborhood of $5
million to $7 million a year.
A. Metroni That will be incremental to what you're running now?
S. Nielsen No. Those were extensions, Alan.
A. Metroni Extensions of what you have?
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S. Nielsen Yes. We have that work currently.
A. Metroni And lastly, if I'm right on this Comcast work, some of those jobs
are new jobs maybe; it looks like share gains from other
competitors?
S. Nielsen I don't know that we took work from anybody, but we were asked to
help out to make sure that they met the schedules that they had
committed to and we were happy to do that.
A. Metroni Do you have any sense about when you're going to hear about
maintenance work or others from Comcast?
S. Nielsen Yes. I think that's an evolving process, Alan. I don't expect
that there will be a singular approach, but I know what their
long-range plan is. I also know that they generally get where
they want to go.
A. Metroni Great. It looks like you have a lot of good things ahead of you.
I appreciate it. Thanks a lot for the update. Do you expect to
have a conference call when you close these deals to give us ...?
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S. Nielsen Absolutely. When we own the businesses, we will provide more
granular detail.
A. Metroni And then lastly, is that the reason why you didn't give us two
quarters out guidance? You wanted to close the deals and talk a
little more about things?
S. Nielsen I think that would be a pretty good approximation of what we were
thinking.
A. Metroni Thank you.
Moderator We have a question now from the line of Angelo Metioli with
Aspland. Please go ahead.
A. Metioli On these two pending acquisitions of First South and Utiliquest,
could you tell me what your estimated goodwill would be from
those purchases?
S. Nielsen Yes. I think we haven't closed and so we're a little bit reticent
to provide that kind of detail, but I think we can say safely
that it's in the neighborhood of $140 million.
A. Metioli Thank you very much.
Moderator We have a follow-up question from the line of Alex Rygiel with
Friedman, Billings, Ramsey. Please go ahead.
A. Rygiel A quick question for Dick. Backlog at the end of this quarter was
about $900 million in total, about $417 million to be worked off
over the next 12 months. Can you give me the same corresponding
figures for the end of the fiscal first quarter of '03?
S. Nielsen We can give you the total, Alex, because I have a schedule in
front of me. It was $673.8 million. What it was in the 12-month
period we're checking.
A. Rygiel Doing the quick math, that looks like it's up about 30% plus?
S. Nielsen That would be my quick math also.
Moderator We have a follow-up question from the line of Mark Hughes with
SunTrust. Please go ahead.
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M. Hughes In terms of subcontractor use, are you using more subcontractors
or are you hiring folks internally?
S. Nielsen I think we're doing both right now, Mark. As we indicated, we
have demand for additional crews and we are both hiring employees
and adding subcontractors.
M. Hughes Now how about in the fiber to premises, is that work that the
ILEC would normally do themselves? Is that something they
outsource or would they even have the capacity to do that kind of
incremental work?
S. Nielsen I think, Mark, that any one of the ILECs could do anything they
wanted to to accomplish the work. They all have different work
practices. Sometimes, even within an ILEC, from region to region
around the country they will do some things in house and
outsource others and the mix changes. We would think, generally,
if construction activity picks up, that each one of the ILECs
makes use of contractors. So I think there will certainly be a
general benefit that we could speculate upon. Anything more
specific would be case by case.
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M. Hughes Right. Do you think they'll be hesitant as activity picks up to
make permanent hires and more likely to outsource? Do you think
that will be...
S. Nielsen If we get a chance to voice our opinion, we'd certainly say the
same thing.
M. Hughes I'm sure you'll pass that along.
S. Nielsen We'll use you as a reference, Mark.
M. Hughes All right. Appreciate it.
Moderator We have a follow-up question from the line of Alan Metroni with
Copper Beach Capital. Please go ahead.
A. Metroni Last year you had one of your worst quarters in a long time, this
coming equivalent of the fiscal, I guess, second quarter for '03.
The weather hurt you and it seemed like there wasn't much
business. A year makes a lot of difference, but November, I'm
hearing from a lot of construction companies and other companies
that deal with outside plants that, obviously, and I'm sitting
here in New York, weather is pretty good in
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November. Can you give us a sense of how the quarter is going so
far or how November compares with your expectations versus last
year?
S. Nielsen I think generally it's been, as I said in my comments, normal
seasonal weather. The issue in our business, as we talked about
last year, is the weather between the holidays. If you have
significant weather and you have mid-week Christmas and New
Year's, it can make for a short quarter, like about a week
shorter than normal. That's what we'll just have to pay attention
to.
A. Metroni Also, Bell South is up, I guess, every quarter the last four.
Looking at their cap ex budget, it looks like they've spent
almost 5% more sequentially, and it looks like they're going to
spend 10% to 15% more. A lot of the RBOCs look that way in the
fourth quarter. Is this just, as you said earlier, maybe just
economic activity coming back a little or are you seeing a lot of
project work coming out that had been on hold for some of the
RBOCs for a long time?
S. Nielsen I think, generally, as they start feeling better about the
economy they start to spend some money. To the extent that there
is some, perhaps not access line growth in total, but access line
growth in certain specific geographic
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areas that they will spend money to maintain good customer
service. None of our ILEC or RBOC customers, you know, is ever
going to let a capital budget get between them and providing good
service, so area by area spending can be up.
A. Metroni And then lastly, regarding First South and Utiliquest, can you
give us some of the big customer exposures of the companies? I
mean you talked about MSA work for them and sort of recurring
business. Which of the RBOCs or which of the utilities are they
most exposed to?
S. Nielsen First, South clearly is a leading provider to Bell South. They
also perform work for Century Tel and some of the rural southeast
telephone providers; Utiliquest, not surprisingly, folks like
Qwest, Bell South, Verizon, Excel Energy, some of the other
electric utilities that they serve in conjunction with their
multiple locates for communications companies.
A. Metroni And then two other quick questions. I appreciate the time you're
spending. Your guidance for this coming quarter, I mean I know
maybe once bitten twice shy regarding weather, what does it
assume for weather, how many work days?
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S. Nielsen I think normal winter weather, but not the kind of weather we had
last year, which was outside the norm in our experience.
A. Metroni Then I guess not the kind of weather we're having so far in
November either?
S. Nielsen You said that, Alan. We didn't.
A. Metroni That's fair. Lastly, the next question regards are there any new
customers that you got from these deals? I mean customers that
you haven't had experience with and working with, and maybe you
can sell them more services or maintenance services or expose
them to more of the Dycom family?
S. Nielsen I think historically we've had work for Century Tel, but not near
the opportunity that First South has. I think generally in our
locating business, and I think this would also be true with
Utiliquest, that that business tends to work for more gas and
electric utilities, any utility that has buried facilities. So to
the extent that that piece of our business grows, you also see an
increase in recurring revenue, but you also see a broader
customer base.
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A. Metroni I'll ask it because I've come up with a new question. From a
maintenance perspective, when you get MSA work or some more
maintenance work for cable companies or others, can you give us a
sense of what the margin differential is between that work from a
gross margin perspective versus some of the more time-intensive
upgrade work?
S. Nielsen I think that we'll always shoot to have consistent margins across
those businesses, and we've been able to on the telephone side.
In the cable industry that's an evolving model, and we will
manage as much margin out of it as we can and remain competitive.
A. Metroni Great. Thank you.
Moderator Mr. Nielsen, we have no further questions at this time. Please
continue.
S. Nielsen Thanks, everyone, for your time and attention, and we'll speak to
you after our next quarter, towards the end of February. Thank
you.
Moderator Ladies and gentlemen, that does conclude our conference for
today. Thank you for your participation and for using AT&T
Executive Teleconference. You may now disconnect.